On July 9th, the Department of Finance moved to tighten Canada’s mortgages markets by saying changes to the requirements for federally-backed mortgage insurance. The changes set minimum credit score scores that home purchasers should meet to qualify for mortgage insurance coverage on so-called ‘high-ratio mortgages” while restricting amortization phrases to 35 years and requiring a minimum 5% down fee on mortgages insured by means of the Canadian Mortgage and Housing Corporation (CMHC) or other government-backed personal mortgage insurers.

The tightening of Canada’s mortgage insurance coverage rules, which can take effect on October 15th, is broadly seen as a measure to further tighten Canadian mortgages market and forestall the credit issues that have crippled the U.S housing market. In announcing the changes, the Department of Finance characterized them as “a responsible and measured method by the government to make sure Canada’s housing market remains robust and to cut back the danger of a U. S.-style housing bubble growing in Canada.”

Under the Bank Act, mortgages from federally-regulated lenders, together with banks, credit score unions, and caisses depots, should be insured where the value of the mortgage exceeds 80% of the value of the property or home being purchased or financed. Such high-ratio mortgages are insured primarily by the Canadian Mortgage and Housing Corporation, a federal Crown Corporation, but also through a handful of private mortgage insurers – Genworth Financial Canada, AIG and PMI Mortgage Insurance. The federal authorities guarantees the obligations of these mortgage insurers to lenders within the event of their not covering the prices of defaulted mortgages.

Effective October 15th, new federal rules would require that the loan-to-value ratios for federally-backed mortgages not exceed 95%, that amortization durations not exceed 35 years and that potential borrowers have a minimum credit score of 620 and a debt service ratio (the proportion of income that goes to servicing existing debts and housing costs) of not more than 45%. The new rules may also require evidence of the reasonableness of the mortgaged property’s value and of the borrower’s source and stage of income.

The new rule adjustments come at a time when Canadian actual estate markets are already cooling off. Growth in housing costs showed a really moderate 1.1% year-over-year achieve in May, in accordance with the latest numbers from the Canadian Real Estate Association, as Canadian markets and client expectations have adjusted in response to the fixed barrage of unhealthy news in regards to the worst U.S. housing market slump for the reason that Great Depression and sobering forecasts concerning the state of a Canadian economy that’s coming to grips with escalating power and commodity prices.

The tightening of amortization periods and loan-to-value ratios will seemingly have a further dampening impact on Canadian housing markets, which already have sharply increased ranges of resale and new home listings. However, this dampening effect might not be felt until after October fifteenth when the new rules come into effect. In the brief term, the transfer to tighten mortgage lending standards may have the opposite effect – offering an impetus for Canadians to take the plunge into extremely leveraged, no-money-down mortgages before the October 15th deadline.

(An October fifteenth implementation date was chosen to provide home purchasers with mortgage pre-approvals the opportunity to train their options before the pre-approvals expire on the end of their standard 90-day term. Note, also, that the mortgages of existing home house owners with high-ratio mortgages, amortization periods in extra of 35 years and substandard credit score scores will be grandfathered under the brand new rules so that they will not be precluded from obtaining mortgage insurance when it comes time to refinance their homes.)

Industry emotions have been blended about this latest move to ensure the solidity of Canada’s mortgages and housing markets. Most industry analysts applaud the move to make sure that Canadian dwelling purchasers do not get sucked into the identical speculative frenzy that fueled the meltdown of U.S housing costs when the sub-prime mortgage market unraveled. Other analysts appear to be expressing the view that this is a case of too-little-too-late or mere window dressing.

Derek Holt, Scotiabank’s vice president of economics, acknowledged that mortgage lending rules had been “modestly tightened” but noted that, “The modifications are more about optics.” Meanwhile, a more pessimistic analysis came from BMO Nesbitt Burn’s deputy chief economist, who noticed that the rule change is “a bit like closing the barn door after the horse has already run down the road.”

Canada’s mortgages and housing markets haven’t experienced the wild speculative bubble that erupted and burst south of our border, largely because of much more conservative lending practices here at home. Canadians were not privy to such innovative and speculative mortgage products as the so-called NINJA mortgages (“no income, no job, no assets), the place borrowers might qualify for mortgages with out adequate proof of earnings or employment that might enable then to afford the requisite mortgage payments, and only a small percentage of Canadians took out the sub-prime mortgages that scuppered U.S. markets. As a result, the proportion of Canadian mortgages in arrears are at the lowest levels – 0.27 per cent – they’ve been at since 1990, whereas Americans are dealing with mortgage foreclosures at a fee not seen since the Great Depression. This tightening of Canada’s mortgage insurance rules seem to be largely a pre-emptive move to reassure Canadian markets and ensure that Canadian house buyers don’t go down the identical path trodden by snake-bitten home consumers south of the border.

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